Integrating R&D Within M&As
This need, in combination with greater access to capital, means mergers and acquisitions in the pharmaceutical industry will increase dramatically over the next few years. Acquisitions already under way include Pfizer and King Pharmaceuticals, Bristol-Myers Squibb and Zymogenetics, and possibly Sanofi-Aventis and Genzyme, as well as others that are starting the courting process.
The best acquisitions occur when the acquiring company has particular expertise that matches the market experience in the pipeline they are acquiring—but they still need to get the integration right.
The challenge for CEOs involved in M&As will be how well their companies integrate R&D across the merging entities so they are not just achieving cost synergies by closing research labs or efficiency of scale, but instead actually bringing drugs to market that meet the evolving needs of patients. To be successful they need to embrace a multidisciplinary integration approach of scientists and business people. This requires an increased flow of information between the two merging companies across scientific disciplines, therapeutic classes, and the commercial organization. The integration has to drive this, but in a simplified way.
For the next wave of mergers, CEOs should insist that their organizations focus on the aspects of integration that drive value. Too many companies use a highly mechanical approach based on their past deals. CEOs today should simplify the integration process so it focuses on real value creation. Start by setting the merger intent, demonstrate results through 100-day projects, and declare success only when the value has been created.
Set a Merger Intent that Captures Value
This "merger intent" is the vision for the company at some point in the near future—ideally one year post-close—in order to satisfy key constituents, employees, customers, investors, and analysts who are desperate for confirmation that the deal is successful sooner rather than later.
Created in joint executive-team sessions or coalesced through one-on-one dialogue with executives, the merger intent should answer questions about anticipated changes, projected growth and profits, organization size and structure, quality requirements, competitive strategies, product development, customer service platforms, and much more. This may seem so obvious, but most CEOs do not do this in a way that clarifies the path for return on investment.
The CEO must be the champion, the point person, and the driving force in the effort to persuade employees to dedicate themselves to helping achieve the merger's goals. Generating broad enthusiasm and active support is essential for overcoming the many obstacles that work against M&A success and which derail so many mergers. The CEO must win everyone's hearts and minds to make integration of the merger successful. This is done by providing clear direction at all points during the pre-merger and post-merger periods.
Leveraging Rapid Results
Post-merger rigor is achieved through 100-day rapid results projects: rapid-cycle, result-producing projects that implement a work program directed at creating value. It is the central vehicle for driving organizational, cultural, and performance change. Most of all, it results in increased ROI.
Depending on the size and complexity of the merger, several cycles of 100-day projects may be required to complete the post-merger integration period. Think of post-merger integration as a portfolio of longer-term horizontal activities and shorter-term vertical 100-day projects that drive immediate value—and provide learning.
For instance, when Big Pharma acquires small biotechs they need to leverage their strengths. Big Pharma is very marketing-oriented, while biotechs are more R&D-oriented. Big Pharma needs to set 100-day projects that retain the jewels in the pipeline and increase the speed to market. For instance, they could set up a 100-day project with cross-functional teams comprised of pharmacology, biostatistics, physiology, and even the commercial organization focused on speeding up clinical trials by 20 percent and ultimately making tough decisions about the portfolio that best meets patients' needs.
As the integration plans are developed, the need for multiple cycles of 100-day projects can be easily assessed. Closing physical facilities, renegotiating purchasing contracts to reduce costs, cross-selling products to new customers in both companies, consolidating customer support, and restructuring research and development are all examples of integration objectives that may demand more than one 100-day period to complete.
The greatest value of cycles of 100-day projects lies in using them as building blocks to achieve major integration goals and to build capacity. This emphasizes one of the key premises of post-merger integration, which is creative and adaptive experimentation.
The CEO, top management, and the integration teams need to be aligned around what must be accomplished post-close. However, integrations rapidly change, are unstable, and create unpredictable events. Companies need to experiment with 100-day projects that demonstrate the value of the combination. This also will allow employees to adapt to new ways of working.
Don't Declare Success Prematurely
Many CEOs assume that with such careful preintegration planning, they could predict the outcome of the merger prior to the close, and all that was required afterward was for the business to follow the recipe. They considered the formal integration period completed at the close of the deal, letting their integration teams disband. This fallacy created a pre-close process that became a sort of bouillabaisse of everything in the cupboard, when all that is actually necessary to make it digestible is a few simple ingredients.
First, ask these questions to gauge if the integration is on the right track:
» Are we achieving bottom-line results in the first 100 days? No excuses. Is the integration achieving value (both revenue and cost), or are people merging functions for integration's sake and saying results will come later? Have our customers recognized the positive impact?
» Do we have the right level of governance and clear mandates post-close? What organizational structure (steering committee, integration manager, and integration teams) will remain and how will they report progress to the CEO? How will ongoing decisions be made as the integration proceeds and synergies are being anticipated?
» What is the plan for assessing readiness for handing off the integration to the day-to-day business? Has the integration delivered, for example, synergy targets, organizational restructuring, excess work out of the system, etc.? Is there a plan for how the various activities will be coordinated with the businesses? Can the handoff be accomplished without interrupting work or losing momentum?
Integration requires a significant amount of planning to be done prior to the close of the deal. It does not imply this planning should be overly complex. While each integration should have a start date and a finish date, CEOs should determine when enough value has been created to declare the post-integration period successfully completed.
Rick Heinick is a Senior Partner and head of the M&A practice at Schaffer Consulting. He can be reached at RHeinick@SchafferResults.com
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